LAHORE: The average effective tariff rate of 11.2% in Pakistan is the highest in the region against 10.6% in Bangladesh, 7.5% in India, 7.0% in Sri Lanka, 5.2% in China, and 4.5% in Malaysia, said the Federal Board of Revenue (FBR) sources.
This protectionism is virtually eroding competitiveness and quality, they added. In the 1970s, they said, Pakistan had adopted the local industry protection policy while Chile and Turkey liberalized their economies. Both these countries saw sustained growth and their manufacturing sectors developed. Turkey even joined the European Customs Union in 1995.
These countries are now exporting value-added goods like machinery and automobiles. Similarly, they said, Vietnam started liberalizing in 1986 by rationalizing tariffs and opting for privatization. In 1995, Vietnam exports were equal to that of Pakistan which are now 10 times higher in 2020.
Since Pakistan did not lower tariffs, they added, it could not integrate into the global value chain. The sources said protection for the manufacturing sector is the standard policy of the government. Manufacturers enjoy exemptions and concessions on the import of items, which if imported by others are liable to duties and other charges. Consequently, the local manufactures neither developed their capacity nor upgraded technology to improve quality for their captive market.
They have pointed out that protection to sectors like auto and textile is high in Pakistan and consumer welfare is totally missing from the entire scheme of tariff. Despite high protection and multiple export promotion schemes, however, local manufacturing is weak and exports are stagnant, they stressed.
In auto sector, they said, the incidence of import taxes on CBUs is as high as 250 percent and in textile it is around 60 percent for garments. The textile sector's contribution in terms of percentage share to GDP and employment is almost stagnant and in auto sector, consumer welfare is altogether missing as evident from high prices, less variety and low quality of vehicles being assembled in Pakistan.
As a local captive market was available to the manufacturing sector, so it was least incentivized to move to the high value chain especially in textile. The existing manufacturing sector of Pakistan can at best be characterized by low adaptation of advanced technology, low competitiveness, low value added, and low quality product segments in exports.
According to sources, tariff structure is sometimes an easy prey for shifting the blame for such deficiencies of industrial sector. Recently, Pakistan has come up with a 'National Tariff Policy' with objectives of simplification, strategic protection of industry, imports substitution and pro-growth tariff structure.
Sources said the protectionism based on infant industry argument, without an exit strategy and sunset date, hardly guarantees success in the long-run as vindicated by textile sector of Pakistan. The beneficiaries of protectionism get accustomed to reaping windfall profits and Protectionism as a strategy of industrialization, if left open, may turn out to be counterproductive for long-term economic growth. They have suggested that protection provided to the local industry should be time-bound with clear sunset date and accountability against rent-seeking.
Copyright Business Recorder, 2020